China's Overinvestment and International Trade Conflict

31 Pages Posted: 23 Jul 2019

See all articles by Gunther Schnabl

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Date Written: 2019


For a long time, China's impressive growth performance has been driven by investment and high productivity gains. Based on the recent discussion on possible overcapacities and overinvestment in China, the paper investigates the sustainability of China's investment- and export-driven growth model. It is shown that since the turn of the millennium buoyant capital inflows and low interest rates have been at the roots of overinvestment and misallocation of capital, which necessitated export subsidies to clear markets. The overinvestment boom is argued to have ended around 2014. Since then, the overcapacities have weakened China's bargaining position in the US-Chinese trade conflict and have tempted the Chinese authorities to postpone a restructuring of the Chinese economy by low-interest credit provision. The resulting gradual reemergence of quasi soft budget constraints is seen to undermine China's long-term growth potential.

Keywords: China, investment, overinvestment, trade policy, credit growth, rebalancing, soft budget constraints, zombification

JEL Classification: E220, E430, E580, F130

Suggested Citation

Schnabl, Gunther, China's Overinvestment and International Trade Conflict (2019). CESifo Working Paper No. 7642, Available at SSRN:

Gunther Schnabl (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Stra├če 12
Leipzig, 04109


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